The Dam Breaks: Tussey v. ABB
Tussey v ABB, Inc., an excessive fee and revenue sharing case decided on the last day of March after a full trial before the United States District Court for the District of Western Missouri, is a remarkable decision, imposing extensive liability for acts involving the costs of and revenue sharing for a major plan, on the basis of extensive and detailed fact finding. It is hard to sum up in a quick blurb, and I recommend reading it in full. However, Mark Griffith of Asset Strategy Consultants has a terrific write up of its its import here on his blog, and here is a nice case summary from Dorsey. Beyond that, I would highlight a few key points about the case, viewed from 30,000 feet (the case itself is going to provide grist for tree level, finding by finding analysis for some time to come).
First, and to me most interesting, is that it confirms several conclusions about excessive fee litigation that I have come to in the past and written on extensively, including my insistence that the pro-defense ruling in Hecker was not the last word on this issue (despite the desire of much of the defense bar to believe it was) but was instead the high water mark in defending against such claims. I argued in the past, with regard to the Seventh Circuit’s handling of this issue in Hecker, that the entire issue of fees and revenue sharing would look different than it did to the court in Hecker once courts began hearing evidence and conducting trials on the issues in question, rather than making decisions on the papers, and this ruling bears that out. Like the trial court decision in Tibble, another key early excessive fee case to actually reach trial, the taking of evidence by the court on how fees were set and revenue shared has, in Tussey, resulted in a finding of fiduciary breach in this regard. Tibble and Tussey reflect a central truth: when courts start hearing evidence on what really went on, it becomes apparent to them that plan participants were not fully protected when it comes to the setting and sharing of fees in the design and operation of the plans in question. To deliberately mix my metaphors, what Tussey reflects is that when courts start looking under the hood of how plans are run, they are not liking how the sausage was made. They quickly (relatively speaking, of course, since it takes a long time to get a case from filing through to a trial verdict) conclude that the fees were set and shared in ways that did not properly benefit the participants.
This particular aspect of Tussey is very important. Tussey involved a major plan and a market making investment manager and recordkeeper, applying what the court characterized as standard industry practices in some instances. It is therefore unlikely that the scenarios found by the court in Tussey to be problematic are unique to that case. Other excessive fee and revenue sharing cases that, like Tibble and Tussey, get past motions to dismiss and into the merits are therefore likely to uncover factual scenarios and problems similar to those identified by the court in Tussey.
What also jumps out at me about Tussey is the extent to which revenue sharing, which has often been characterized in the professional literature as harmless in theory, is strongly depicted as problematic as practiced with regard to the particular plan and by the sponsor and service providers at issue. I would have real question, going forward as a plan sponsor, as to whether it makes any sense at all to continue with revenue sharing. Better to just pay a fixed cost, than to risk extensive liability for engaging in revenue sharing. Absent that choice, the treatment of revenue sharing in Tussey makes clear the need for extensive, on-going, documented analysis by the plan’s fiduciaries of whether the level of compensation generated by the revenue sharing was, and remained at all times, appropriate.
Other aspects of Tussey worth noting include these two. First, the opinion provides as good an explanation, in detail, of what revenue sharing really is and how it works as you are going to find. If you want to understand what all the hullabaloo about revenue sharing is about, this opinion is as good a place to start as any.
Second, the opinion contains a nice analysis of one of the most misunderstood issues in ERISA breach of fiduciary duty litigation, namely the six year statute of limitations and how it applies to the implementation of a fiduciary’s decisions related to plan investments. A decision to change a plan investment takes time, starting with an analysis of whether to do so, followed by the steps needed to effectuate it, and eventually resulting in the final steps needed to permanently conclude the change. As the court explained in Tussey, the statute of limitations in that scenario does not start to run – for any of the losses related to that event – until the last act in that run of conduct occurred.